The company has done well to grow volumes and report better operating margins.
Toothpaste maker Colgate has much to cheer about. With volumes growing 16 per cent, the company posted a good top line, up 18 per cent of Rs 487 crore in the September 2009 quarter. The numbers have surpassed expectations and are better than the June quarter when revenues rose 15 per cent on a volume increase of 14 per cent.
What’s more, while the June 2009 quarter gross margins were down 80 basis points year-on-year, this time around they’re up 120 basis points. With the company saving on inputs, ad spends and overheads, the operating profit margin shot 710 basis points year-on-year, to 19.5 per cent.
Colgate should easily sustain margins at this level, as the market leader with 52 per cent share, is well-positioned to tap the growing demand in a market that has been penetrated to the extent of 60 per cent.
Consumers are switching from toothpowder to toothpaste, and the company has cashed in on this by introducing smaller packs; it now offers a Rs 10 pack in addition to a Rs 5 pack. While competitors have attempted a similar strategy, Colgate managed to hang on to its lead with both, the Colgate and Cibaca brands, doing well and the latter now bringing in an estimated 16-17 per cent of sales.
However, it’s possible that Hindustan Unilever could take further aggressive price cuts in a bid to win market share and that would limit Colgate’s ability to take price increases. Besides, ad spends, are increasing on a sequential basis and could go up later in the year.
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The good news is that there appears to have been little impact of weak monsoon so far, though, it’s possible that rural sales which account for 35 per cent of total sales, could be hit with a lag.
While revenues should grow at a compounded 15 per cent over 2009-11 driven by volumes, earnings could be slightly hurt by a higher effective tax rate. Over the past five years, the stock has traded at an average price multiple of 20 times but right now, at the current price of Rs 682, it trades at 21 times 2010-11 estimated earnings.